“Dale Nicholls assumed responsibility for Fidelity China Special Situations in April following the retirement of Anthony Bolton. Dale has invested in Chinese equities for over 10 years, albeit through a regional fund. The investment trust’s portfolio remains diversified with over 120 holdings and has a bias to two key investment themes: consumption and services. These are plays on the rising middle class in China and its growing propensity to consume. The portfolio has significant overweight exposure to Consumer Discretionary, Health Care and Information Technology, which includes an unquoted holding in Alibaba equivalent to 4.6% of assets.

“Since its launch in April 2010, Fidelity China Special Situations has seen its NAV rise 22% compared with a 3% increase for its benchmark, the MSCI China index. In share price total return terms, the fund is up 9% over the period, which reflects its widening discount. The fund was de-rated following the announcement last year of Anthony Bolton’s retirement, with the discount widening to 10%, despite an increase in buyback activity.

“It is too early to judge Dale Nicholls’ performance record on Fidelity China Special Situations. While he is clearly a well regarded manager within Fidelity, his appointment was surprising given his background as a regional manager. In addition, it is not clear whether Fidelity has sufficient resources at present to manage a highly specialist mid and small cap Chinese equities portfolio. Fidelity has numerous analysts covering the region and is increasing its resources in Shanghai, however, these are not small cap specialists and their coverage will be patchy.

“We remain of the view that Fidelity China Special Situations is an interesting, albeit high risk mandate, with the potential to generate considerable returns. Performance has picked up again in the last few months and, in the short term, the IPO of Alibaba could provide a fillip. However, we believe that a gearing level of greater than 20% of net assets is unwarranted, given the risks involved in the asset class. In addition, the Board has been remiss, in our view, in not providing a tender offer, given the widening discount.”